Country Panel Presentation: Germany - Amazon S3€¦ · Country Panel Presentation: Germany 2016 IGP Regional EMEA Seminar Windsor, May 24 -26, 2016 . Alexander Rottstädt, Key Account

© International Group Program

Country Panel Presentation: Germany

2016 IGP Regional EMEA Seminar Windsor, May 24-26, 2016

Alexander Rottstädt, Key Account Manager, Gothaer Lebensversicherung AG Moderator: Mark Horbag, Account Executive, IGP

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This presentation was exclusively prepared for the attendees of the 2016 IGP Regional EMEA Seminar. None of the contents of this presentation may be copied or disclosed to any other party or used for any other purpose than the one mentioned above without IGP's prior written permission.


Key Topics

Background Information

Country and Company Info &

Background

Social Security

Private Practice

Taxation Administration Legislation

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• Gothaer Group oldest German mutual insurer, one of Germany‘s big insurance groups, one of the country‘s largest mutual insurance associations

Gross premium income of more than € 4.5 billion

More than 4.1 million insured members

Invested assets of € 28 billion

5,910 employees

€ 140 milion consolidated profit

€ 1.78 billion group equity

€ 1.10 billion investment result

More than € 27.85 billion in investments

Company Info

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• Total Population: 81.1 mn Age 65+: 21% Age 20-64: 61% Age <20: 18%

• Economical Situation (2015) Gross domestic product: € 3,025.9 bn Economic growth: 1.7% Inflation rate: 0.25 % Export surplus: € 247.8 bn (+6,4%) 3rd largest exporter in the world

• Labour Market Persons in employment: ca. 43 mn Rate of registered unemployed: 4.8% Increase in real earnings: 3.0%

• Others National Budget 2015: again balanced

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Country Info


Key Topics


Social Security

Summary of Social Security

Benefits

Private Practice


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Social Security Benefits

• Basic Provision Compulsory for employees Funding based on pay-as-you-go system Contributions: split equally between employee and employer Pension benefits

‐ Old-age pension ‐ Disability pension in the event of full or reduced earning capacity ‐ Death benefits for dependants

Unemployment insurance scheme Health insurance scheme Nursing care insurance scheme However …

‐ shrinking benefits ‐ raising of the pensionable age to 67

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Summary


Social Security Benefits Contributions 2015

Type of Social Security Benefit Employee Employer

Social Security Contribution Ceiling

West G East G

Pension 9.35% 9.35% € 74,400 € 64,800

Unemployment 1.5% 1.5% € 74,400 € 64,800

Health 8.4%* 7.3% € 50,850

Long-term Care 1.175% 1.175% € 50,850

Total 20.225% 19.325%

*) Including average supplemental premium charged by health insurance provider

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1.000

900

800

700

600

500

400

1.100

40 % of gross salary

38 % of gross salary 34 % of

gross salary

Gross pension 2010 Gross pension 2020 Gross pension 2030

in €

Source: Deutsche Rentenversicherung, ifo-Berechnungen


• Assumptions: Retirement age: 67 40 – 45 years of paying contributions Gross salary € 35.000 per year

Pension Gap

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43 pensioners

100 premium payers

2000

100 premium payers

2030

71 pensioners


• The performance of the Statutory Pension Insurance comes to its limits in a few years

Demographic challenge

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Summary of Social Security Benefits

• Shift of focus from benefit to sustainability contribution Solid contribution level of 20% until 2020 and 22% until 2030 resp.

• Gradual increase in normal retirement age from age 65 to age 65 + x months for persons born between 1946 – 1963 Age 67 for persons born in 1964 or later

• Worsening of the eligibility and amount of disability benefits since pension reform in 2000

• Employees are required to compensate for their risk of disability and their retirement income, either by employee contributions to a company pension plan or private savings (partly subsidized by a government bonus)

Major Structural Changes

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Basic provision: state pension scheme

tax-privileged Ruerup-Pension

Occupational pension schemes: old-age benefits and/or

disability benefits and/or

surviving dependants‘ benefits

Optional private pension benefits: Life insurance contracts or private equity

investments

so-called tax-privileged “Riester-Pension”

1st

Laye

r 3r

d La

yer

2nd

Laye

r German Pension System Three Layer System

With reductions in social security benefits, German Government has shifted parts of the financial burden of an ageing society onto the companies and the individual

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Key Topics


Social Security

Private Practice

Customary Private Employee Benefits:

Type & Level of Benefits / Survey

Data / Plan Design / Benchmarking /

Trends


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Customary Employee Benefits Schemes

• What is an „occupational pension scheme“? § 1, Employers' Retirement Benefits Law

‐ Old-age benefits and/ or

‐ Disability benefits and/ or

‐ Surviving dependants‘ benefits

‐ on the condition of an employment contract

Pillar II

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• Definition Employee benefits are a

commitment of the employer to grant ‐ old-age benefits ‐ invalidity benefits and / or ‐ dependants benefits

based on an employer-employee relationship

Occupational pension schemes do not provide ‐ medical benefits and ‐ accident benefits

Basics of Employee Benefit Schemes

• Pension promises in Germany Defined benefit

‐ traditional pension promise

Contribution oriented defined benefit ‐ becoming more and more

popular

Defined contribution with minimum benefit ‐ very often combination of a

guaranteed part plus investment in funds with the chance of higher income return

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Customary Employee Benefits Schemes Funding Vehicles for Retirement Benefits (2/2)

Funding vehicle Asset Accumulation

Funding Regulations

Impact on Local Balance Sheet

Insolvency Protection Cover*

Direct Pension Promise

internal none yes

compulsory

Support Fund

external

none / insurance-type guarantees

none

Direct Insurance insurance type

guarantees none

(in principal)

Pensionskasse

Pensionsfonds insur. or non-insurance type guarantees

compulsory (reduced contribution level)

* Pensions Sicherungs Verein: Pension Security Association

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Customary Employee Benefits Schemes Funding Vehicles for Retirement Benefits (1/2)

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• Direct Pension Promise (Direktzusage)

• The employer commits contractually to pay retirement benefits directly to an employee; usually a reinsurance contract is in force

• Support Fund (Unterstützungskasse)

• A support fund is a separate legal entity from the employing company through which employee benefits are financed

• Direct Insurance (Direktversicherung)

• A direct insurance is a pension insurance contract between employee, employer and an insurance company

• Pensionskasse

• Special type of insurance vehicle providing retirement benefits

• Pensionsfonds

• Separate legal entity that was originally set up with the intention of encouraging external pre-funding of pension obligations


Customary Employee Benefit Schemes

• Common practice for employers to offer pension plans 90% of employers with 200 or more employees run

occupational pension plans (employee and/or employer financed) The number of employees with a company pension in the private sector

has in recent years risen from 35% to 48% Expectation: small size companies and start-ups will follow

• Company pension plans usually provide for normal and early retirement benefit long-term disability benefits survivor’s benefits

Type of Plans

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Type of plan

Benefit

Funding vehicle

Funding

Balance sheet impact

Contributions

Contribution oriented defined benefit plan

(2) Employer-financed

Direct Insurance Reinsured Support Fund

Fully funded via insurances (classic or unit-linked investment)

None

(1) Employee-financed

Matching contribution

1-4% of salary 1-4% of salary up to SSCC (max. 4% of SSCC) 1,5-6% of salary above SSCC

SSCC = Social Security Contribution Ceiling

Old-age pension Contribution oriented: old age Defined benefit: life, disability

Benefit amount Old age: based on contribution

Life: 1-3x salary Disability: x% of salary

Customary Employee Benefits Schemes Example of a Modern Employee Benefit Plan

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Customary Employee Benefit Schemes

• Legal entitlement on the part of the employee § 1a 1a article 1 of the German employers´ retirement benefits law

(BetrAVG). ‐ Per 1/1/2002: legal entitlement of German employees to receive at least an

employee-financed occupational pension scheme ‐ Maximum possible defined tax- and social insurance-free contribution: 4% of

the Social Security Ceiling (SSC) of the Statutory Pension Insurance ‐ German Companies are therefore legally obliged to provide their employees

with an appropriate occupational benefit scheme

Facts to Keep in Mind

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• Contributions derived from salary conversions are tax-free *

• Contributions derived from salary conversions are social security contributions free

• Employers and employees mutually profit from a salary sacrifice plan

Salary Sacrifice Plan – Benefits

Contribution of the Employee € 1,200.00

Hereupon Saved Tax 360.00 **

Hereupon saved social insurance contributions:

Statutory pension insurance 9.350% 112,20

Statutory unemployment insurance 1.500% 18.00

Statutory health insurance 7.300% 87.60

Statutory long term care insurance 1.175% 14.10

Savings per year 19.235% 231.90

Net expenditure: 608.10

(even though € 1,200 will be paid into the pension scheme)

* max. possible tax- and social ins.-free contribution: 4% of the SSC of the Statutory Pension Insurance ** assumed tax rate = 30% / monthly gross income < SSC

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Per year in 5 years in 10 years

1 employee € 231.90 € 1,159.50 € 2,319.00

5 employees € 1,159.50 € 5,797.50 € 11,595.00

20 employees € 4,638.00 € 23,190.00 € 46,380.00

Salary Sacrifice Plans - Employer’s View

• Benefits: Savings on the employers‘ share of the social insurance contributions

• Savings for the employer:

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Customary Employee Benefits Schemes Challenges: Low Interest Period

31.12.2013: 1,94%

Source: Deutsche Bundesbank (09.02.2016)

0.00.20.40.60.81.01.21.41.61.82.02.2

31.12.2014: 0,54%

10.06.2015: 1,01%

30.12.2015: 0,64%

17.04.2015: 0,07%

08.02.2016: 0,25%

2013 2014 2015 2016

Net operating margin of federal bonds with a duration of 10 years

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Customary Employee Benefits Schemes Challenges: Guaranteed Interest Rate

3,50%

4,00%

3,25%

2.75%

2.25%

1.75%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

July 86 – July 94 July 00 - Dec. 03

July 94 – June 00

Jan. 04 – Dec. 06

Jan. 07 – Dec. 11

(*) Obligatory specified by German Federal Financial Supervisory Authority

1,25%

As of Jan. 12

As of Jan. 15

note: illustration as of 1986; guaranteed interest rate before July 1986 = 3,00%

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• 1 in every 4 German workers will experience a period of disability during their working life

• Approximately 400,000 statutory insured people annually claim for a statutory pension for reduced earning capacity. However, only 40% of the applications are granted

Challenges: Disability Risk

Probability of Disability

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Challenges in the German EB-market: the risk to become incapable to work

• Very limited benefits of the state in this regard: Incapacity benefits of the German social insurance carrier only provide

a basic income – without adequate insurance cover, a period of disability poses a serious threat to an individual’s financial security

Many German product-testing organisations and even the German State recommend that every working individual should have an additional disability coverage!

• The most favourable way is to establish a corporate disability pension scheme

Challenges: Disability Risk

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Customary Employee Benefits Schemes Health Insurance in Germany

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Customary Employee Benefits Schemes Health Insurance - supplemental health insurance benefits

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Customary Employee Benefits Schemes Health Insurance - supplemental health insurance benefits (example)

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• Supplemental health insurance insurance benefits can be employer and / or employee paid

• Please see the below example which outlines the benefits of an employer funded supplemental health plan:



• Move from defined benefit plans to contribution based schemes remains unchanged

• There is an ongoing trend toward transfer of pension from book reserve to external funding

• The appreciation for retirement plans remains unbroken actually increasing in light of talent shortage

• Global and cross-border considerations are becoming more and more important

• Cost- and resource-efficiency are top priorities for most companies today – pooling –

Trends

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Key Topics


Social Security

Private Practice

Taxation

Taxation of benefits (e.g. lump

sum versus pensions) /

Tax treatment of ER and EE

contributions

Administration Legislation

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Taxation Treatment of Contributions

Funding vehicle Income tax Social Security Contribution

Direct Pension Promise

Contributions are tax-free

Free of contribution (employer funded); free of contribution up to 4% of SSCC

(employee funded) Support Fund

Direct Insurance

Contributions are tax-free up to a maximum of 4% of SSCC

plus € 1,800 p. a.

(additional amount under certain conditions)

Free of contribution up to up to 4% of SSCC

Pensionskasse

Pensionsfonds

SSCC = Social Security Contribution Ceiling 2014: 71,400 €os

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Taxation Treatment of Benefits

Funding vehicle Income tax Social Security Contribution

Direct Pension Promise Fully taxable acc. to § 19, sec. 1,

no. 2 Income Tax Law

Benefits of either statutory or voluntarily insured pensioners are subject of

contribution up to SSCC- health/elderly care insurance

Support Fund

Direct Insurance

Fully taxable acc. to § 22 no. 5 Income Tax Law Pensionskasse

Pensionsfonds

SSCC = Social Security Contribution Ceiling/ health/elderly care insurance/ 2015: 49.500 €os

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Key Topics


Social Security

Private Practice


Legal requirements re. administration of

benefit plans: actuarial valuations / communications / involvement of

unions/employees

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Administration of Plans

Funding vehicle Administration effort Funding regulations Impact on local

balance sheet Benefits Provider

Direct Pension Promise none yes employer

Support Fund none / insurance-type guarantees

none

Support Fund

Direct Insurance insurance type

guarantees

Insurance company

Pensionskasse Pensionskasse

Pensionsfonds Insur. or non-insurance type

guarantee Pension Fund

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Key Topics


Social Security

Private Practice


Current legislative issues with

significant impact on the funding of the benefit plans / How are employer

and employees affected?

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Legislation

• Reduction of guaranteed interest rate for new insurance contracts from 1.25 % to 0.9% planned as of 2017

• Political discussion about of the implementation of mandatory or opting-out company plans for salary conversion

• Secretary of Labor - Ms Nahles – announces a pension reform due to the changes of the economic and demographic environment

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Update


Thank you for your attention! Key Topics We Discussed:


Country and Company Info &

Background

Social Security

Summary of Social Security

Benefits

Private Practice

Customary Private Employee Benefits:

Type & Level of Benefits / Survey

Data / Plan Design / Benchmarking /

Trends

Taxation

Taxation of benefits (e.g. lump

sum versus pensions) /

Tax treatment of ER and EE

contributions

Administration

Legal requirements re. administration of

benefit plans: actuarial valuations / communications / involvement of

unions/employees

Legislation

Current legislative issues with

significant impact on the funding of the benefit plans / How are employer

and employees affected?

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www.gothaer.de

Contact Info

Alexander Rottstädt

Gothaer Lebensversicherung AG

+49 221 30 82 32 62 [email protected]

Key Account Manager

Documents

Country Panel Presentation: Germany - Amazon S3€¦ · Country Panel Presentation: Germany 2016 IGP Regional EMEA Seminar Windsor, May 24 -26, 2016 . Alexander Rottstädt, Key Account